497 B.R. 668
Bankr. D. Mass.2013Background
- Karen and Allen Woodman acquired registered land in Lowell, MA; the Land Court issued a certificate of title with a memorandum of encumbrances.
- In 2003 and 2004 the Woodmans granted mortgages to MERS/Principal (later assigned to Citi) and to Principal Bank (later assigned to Nationstar); both mortgages and assignments were mistakenly recorded in the county Registry of Deeds, not the Land Court, and thus did not appear on the Land Court certificate.
- In March 2012 the Woodmans recorded a state homestead declaration and filed a Chapter 7 petition; trustee Jonathan R. Goldsmith was appointed and claimed the homestead exemption for the estate.
- The trustee sued to avoid the Citi and Nationstar mortgages under 11 U.S.C. § 544(a)(3) (strong-arm as hypothetical bona fide purchaser), preserve the liens under § 551, and declare the homestead subordinate to the preserved liens; trustee moved for summary judgment.
- Citi moved for summary judgment arguing (1) recording in the registry of deeds gave constructive notice so § 544(a)(3) cannot avoid its lien, (2) if the lien was unperfected the trustee cannot be placed in a better position than Citi (i.e., cannot convert an unsecured claim into a preserved lien), and (3) the Woodmans’ homestead remains subordinate to Citi’s interest.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether trustee may avoid mortgages on registered land under § 544(a)(3) because mortgages weren’t recorded in Land Court | Trustee: mortgages unperfected under Mass. Gen. Laws ch.185 §57; as hypothetical bona fide purchaser trustee may avoid them | Citi: recording in registry of deeds gave constructive notice; no purchaser would be BFP so §544(a)(3) unavailable | Held for trustee: certificate of title contained no facts to trigger constructive notice; trustee qualifies as BFP under state law, so §544(a)(3) avoidance allowed |
| Whether avoided liens can be preserved for the estate under § 551 | Trustee: avoided liens preserved and become estate liens, high priority over homestead | Citi: preserving the lien would put estate in a better position than Citi had under state law (unsecured only) | Held for trustee: mortgage was voidable (not void); preservation under §551 is permissible and yields estate lien rights |
| Whether recording mistakes convert mortgage into void instrument (vs contract right to perfect) | Trustee: failure to register renders mortgage unperfected as to BFPs but does not void mortgage; trustee can avoid and preserve lien | Citi: if mortgage unperfected then Citi only an unsecured creditor—estate should not get better rights than Citi | Held for trustee: Mass. Gen. Laws ch.185 §57 treats unregistered instrument as contract giving right to register later; mortgage not void, so trustee may avoid and preserve lien |
| Priority between preserved liens and the Woodmans’ homestead exemption | Trustee: preserved liens have priority over homestead; trustee steps into mortgage holder’s priority | Citi: homestead is subordinated by statute and mortgage contract; even if Citi unsecured, homestead should be subordinate to Citi’s claim | Held for trustee: preserved liens are superior to homestead; Citi’s unsecured promissory-note claim is not entitled to homestead subordination absent a preserved lien |
Key Cases Cited
- Butner v. United States, 440 U.S. 48 (trustee’s rights defined by state property law)
- Jackson v. Knott, 418 Mass. 704 (certificate of title controls; constructive notice requires facts on certificate prompting further search)
- Doyle v. Commonwealth, 444 Mass. 686 (purchaser of registered land takes free of unlisted encumbrances absent actual or constructive notice)
- Calci v. Reitano, 66 Mass. App. Ct. 245 (no constructive notice when certificate of title makes no reference to off-record encumbrance)
- Commonwealth Elec. Co. v. MacCardell, 450 Mass. 48 (actual or imputed knowledge defeats good-faith purchaser status)